To set up a business escrow account, choose a neutral third-party agent, gather your corporate identification documents, sign an escrow agreement that defines exactly when funds will be released, and wire the money into the account. The agent holds the funds until the seller meets every condition the two sides agreed to, which is why escrow shows up in mergers, acquisitions, and high-value asset transfers where neither party wants to move first without protection.
The work sits in the details. Who holds the money, what triggers release, who pays the fees, who owes tax on the interest, and what happens if the deal collapses all need to be settled in writing before a dollar moves.
Pick an Escrow Agent
The escrow agent is the neutral party that holds and distributes the funds. You have two practical options: a commercial bank’s trust department, or a licensed independent escrow company. Banks bring an established compliance infrastructure. Independent firms often specialize in a particular type of transaction. Either way, the agent must have no financial interest in the deal itself. That neutrality is the whole point.
Most states require independent escrow companies to hold a license, so confirm that any non-bank agent is licensed in the state where the transaction will close. A bank-held escrow is covered by the bank’s existing regulatory framework. If the parties sit in different states, pick an agent licensed or chartered in a jurisdiction that reaches both sides.
Gather the Documents You’ll Need
The agent won’t open the account until you’ve assembled a standard set of corporate records:
- Your Employer Identification Number, the federal tax ID issued by the IRS, which becomes the primary identifier on the account.1Internal Revenue Service. Employer Identification Number
- Formation documents proving the business is legally registered and in good standing: Articles of Incorporation for a corporation, Articles of Organization for an LLC.
- A government-issued photo ID (passport or driver’s license) for every individual authorized to sign for the business.
- A completed IRS Form W-9 from each party, which the agent needs to report interest and to avoid backup withholding.2Internal Revenue Service. Instructions for the Requester of Form W-9
Federal anti-money laundering rules also require the agent to identify anyone who holds significant ownership in the company, generally anyone owning at least 25 percent or exercising substantial control.3Financial Crimes Enforcement Network. Beneficial Ownership Information Reporting Rule Fact Sheet Have names, dates of birth, addresses, and ID copies ready for those individuals. One small point that trips people up: the legal name on the escrow application must match your state filings exactly. A mismatch delays account opening.
Draft the Escrow Agreement
The escrow agreement is the contract governing how the agent holds, invests, and releases the funds. Both parties and the agent sign it, and once money is deposited the agent follows the document literally. Have an attorney review it before you sign.
Release Conditions
The most consequential section defines the specific events that trigger disbursement. Make them objective and verifiable, not subjective judgments the agent would have to interpret. Typical milestones include the completed transfer of intellectual property titles, a successful regulatory filing, or the expiration of an inspection period without objection. The agreement should also address what happens if a milestone is only partially met or if the timeline shifts.
Fees and Who Pays Them
Escrow agent fees depend on transaction size and complexity, and the agreement should say who pays: buyer, seller, or a defined split. Spell out every charge. Account setup, annual maintenance, wire transfer fees, and any early-termination costs all belong in the document.
Interest on Deposited Funds
Many business escrow accounts invest idle funds in a money market or short-term instrument, so the agreement needs to say whether the interest accrues to the buyer, to the seller, or is added to the escrow balance and distributed with the principal at closing. Whoever is allocated the interest owes tax on it, so both parties should settle this before signing.
Dispute Resolution
Build in a process for resolving disagreements without immediate litigation. Business escrow agreements often require mandatory arbitration or mediation as a first step and specify how legal fees will be allocated if a conflict arises. Setting this out upfront prevents a fight over the fight.
Indemnification of the Agent
Nearly every escrow agreement protects the agent from liability for actions taken in good faith based on the documents presented. A typical clause says the agent is not responsible for verifying the genuineness or accuracy of documents it receives, and that both parties will indemnify the agent for losses connected to the escrow except those caused by the agent’s own gross negligence or intentional misconduct.4SEC.gov. Form of Indemnification Escrow Agreement Read the scope carefully. Some agents draft their duties so narrowly they have almost no obligation to flag problems.
Sign and Fund the Account
Once all parties agree on the terms, the authorized signers execute the agreement. Under the Electronic Signatures in Global and National Commerce Act, electronic signatures on an escrow agreement carry the same legal weight as ink, so remote signing through a digital platform is valid for most commercial transactions.5Office of the Law Revision Counsel. 15 USC Ch. 96 – Electronic Signatures in Global and National Commerce Some agents and certain deal structures still require wet-ink originals, so confirm the agent’s requirements in advance.
Funding is usually done by wire transfer, which moves the funds irrevocably. The agent provides Fedwire routing and account numbers for the escrow sub-account, and the depositor initiates the transfer through their primary bank. Some agents also accept cashier’s checks or ACH transfers for smaller amounts, though ACH takes longer to settle and may not qualify as “good funds” in every jurisdiction. Once the money arrives, the agent issues a formal notice of deposit to all parties confirming the funds are secured and the agreement is active.
Insurance and Tax on the Money in the Account
If the account is held at an FDIC-insured bank, deposited funds may qualify for pass-through insurance, meaning coverage runs to the actual owner of the funds rather than to the agent. Three conditions have to be met: the funds must actually be owned by the depositor and not the agent, the bank’s records must reflect the agency nature of the account, and the identities and ownership interests of the principals must be documented.6FDIC. Pass-through Deposit Insurance Coverage Coverage runs up to $250,000 per depositor, per bank, aggregated with any other deposits that owner holds at the same institution in the same ownership category. For deals larger than that, ask whether the agent spreads funds across institutions.
Any interest earned on escrowed funds is taxable income. The agent reports interest of $10 or more on IRS Form 1099-INT, sent to the party allocated the interest under the agreement.7Internal Revenue Service. About Form 1099-INT, Interest Income In many acquisition escrows the buyer receives the 1099-INT because the funds are treated as the buyer’s property during the holding period, even if the interest is ultimately paid to the seller at closing. If a party fails to provide a valid W-9 with a correct taxpayer ID, the agent must withhold 24 percent of reportable interest as backup withholding and remit it to the IRS.8Internal Revenue Service. 2026 Publication 15 Submit the W-9 at account setup. Don’t treat it as optional.
Release and Close the Account
The agent releases funds only after receiving documented proof that the agreed milestones have been satisfied. In most agreements this takes the form of a release authorization signed by both the depositor and the beneficiary. The agent checks the request against the original terms and, once verified, wires the funds to the beneficiary.
After the final disbursement brings the balance to zero, the agent prepares a closing statement detailing all deposits, interest earned, and fees deducted, then issues a closure letter terminating their responsibility. Keep the closing statement and related documents for at least seven years for tax records and as proof of how the funds were handled.
If the Deal Falls Through
A well-drafted escrow agreement already answers this question. It should include a cancellation provision directing the agent to return funds to the depositor if specified conditions are not satisfied by a stated deadline. Negotiate that provision before signing, not after.
Disputes get harder when the buyer and seller give the agent conflicting instructions. Because the agent has no stake in the outcome, it will typically freeze the funds and wait for written agreement from both sides or a court order. If no agreement comes, the agent can file an interpleader action, a court proceeding in which the agent deposits the disputed money with the court and asks to be dismissed from the case.9Office of the Law Revision Counsel. 28 U.S. Code 1335 – Interpleader The parties then argue their claims before the court, and the judge decides who gets the funds. The agent is generally entitled to recover its legal costs for filing the interpleader from the escrow balance, so a contested closing can eat into the money at stake.